Tata Sponge had proposed, for shareholder consideration, three related party transaction (RPTs) resolutions at its AGM. The company faced defeat on all the three resolutions for approval of RPTs with just 3.77 per cent of the total shareholders opposing it. Interested parties cannot vote in RPTs resolutions.

Out of the 45.5 per cent non-promoter shareholders, only 12.43 per cent participated in the voting; of which 66.76 per cent opposed the resolution. Section 188 of Companies Act, 2013 prohibits voting of interested party while Sebi LODR prohibits all related parties from voting irrespective of whether the shareholder is a party to the transaction or not.

Effectively, shareholders with just 3.77 per cent of total equity capital defeated the resolution, while promoters with 54.50 per cent supported the resolutions and another 41.73 per cent were indifferent in that they abstained from voting. This indicated that shareholders holding 3.77 per cent were able to bulldoze the wishes of 96.23 per cent because of the law created for their protection.

“The existing legal framework under the Companies Act and the Sebi Listing Regulation may appear to be an excellent piece of legislation and was much needed to curb the menace of abusive RPTs” said JN Gupta, MD of proxy advisory firm Stakeholders Empowerment Services (SES), adding, “However, defeat of three RPTs of Tata Sponge in the recently concluded AGM has perturbed SES and forced us to analyse the pros and cons of the existing legal framework in this regard.”

SES also believes that any power bestowed upon any individual/ class of people must be used responsibly and judiciously, and the shareholders of the company, whether minority or majority, are no exception to this. Although SES has been fighting on behalf of minority shareholders’ rights, the voting results of TSIL AGM, has forced SES to analyse the flip side of the RPT legislation, given abysmal participation of investors in the voting process.

Related party transactions (RPTs) is at the centre stage of corporate governance arena for the past couple of years initially due to problems associated with RPTs and later due to the legislative reform in this regard namely.